25

How You Can Wind Up Wealthy

Have you made the mistake of opening your retirement plan statements lately?

According to researchers at the Urban Institute, retirement accounts have lost a collective $3.4 trillion since October 2007. As a result, people are pulling money out of the market -- stock mutual funds lost $5.2 billion in the week ending April 15 alone.

It's understandable if you've been tossing those statements unopened. It's certainly ugly out there, but consider this: Where would you be right now if you hadn't been saving for retirement at all?

All the difference in the worldThe thing is, the very act of saving money for your retirement matters far more than the rate of return you get on that invested cash. If you save a large enough chunk of your salary, even at very modest rates of returns, you can wind up with more money than if you saved a smaller amount yet enjoyed higher returns.

Over 50 years, for instance, saving 15% of a $50,000 salary but earning a 3% annualized return handily beats saving 1% of that same salary but earning a 10% annualized return.

Save 1% per Year

Save 15% per Year

3% Annual Return

$56,398.43

$845,976.50

5% Annual Return

$104,674.00

$1,570,109.97

10% Annual Return

$581,954.26

$8,729,313.97

Assumes smooth returns and no raises.

Saving a significant chunk of your salary across your entire career means you're practically guaranteed to wind up better off than someone who saved virtually nothing at all. And if you do manage to see returns that approach the market's historical long-run 10% per year, just check out how very large the difference can be.

So, if you're hoping to wind up wealthy, the first step is to start saving as much as possible as soon as possible. Without that strong foundation of savings, there's virtually no way the market will get you there. With it, you're simply that much more likely to amass a significant chunk of money.

If you don't happen to have your whole career ahead of you, you may still wind up wealthy -- but since you won't have as many years for compounding to work its magic, it's even more critical for you to save a larger chunk of your cash.

Is it safe to invest yet?As the chart above demonstrates, the more you save, the more that compounds -- but the higher the rate of return that applies to that savings, the more you'll end up with in the end.

The stock market has been a tremendous tool for building wealth over the long term -- despite its abysmal performance since the end of 2007, or, for that matter, during the Great Depression.

But even if the market never again provides double-digit annual returns, the fundamental truth from that first chart still applies. The more you're able to save, the more you'll end up with, regardless of your returns. That holds true regardless of whether you wind up earning 10% annually or 3%.

Additionally, at some point, the stock market is going to reflect business realities. While the market and the overall economy may be contracting, not every company is on the verge of failing. Just take a look at these companies and how they've performed this year:

With earnings like that amid a deep recession, there's good reason to believe they'll survive this mess and once again thrive as the economy recovers.

With the right long-term perspective and an investing strategy that's centered on a commitment to savings, you can still wind up wealthy over time.

The long term, one day at a timeWhatever your long-run returns, the most important piece is saving the money in the first place. Once you have retirement savings, you can make smart choices that will make sure you can retire in style -- but it won't happen unless you save.

At Motley Fool Rule Your Retirement, we specialize in helping people make those smart choices. If you'd like to see what we recommend, join us at Rule Your Retirement today. For more information or to start your 30-day free trial, click here.

Already subscribed to Rule Your Retirement? Log in at the top of this page.

At the time of publication, Fool contributor Chuck Saletta owned shares of Microsoft.Kraft Foods is a Motley Fool Income Investor selection. Microsoft and Wal-Mart Stores are Inside Value picks. The Foolhas a disclosure policy.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

The MF have a very nice databank of historical data they can use. They contemplate a particular point or thesis that they are trying to make. Then they mine the databank to report a set of companies that confirm the thesis.

But it creates the false impression that it will do us any good going into the future. I can't mine the databank of the future because there isn't one. So I can't select the right set of companies. The only thing I can do is what they do... wait till some years have passed. Then look at the data to find out what I should have done.

Personally I think that it is time to invest in stocks and I started a couple of weeks ago.

First I disagree with comments like "According to researchers at the Urban Institute, retirement accounts have lost a collective $3.4 trillion since October 2007". On CNN they were saying that it was around 11 trillions. Plus, I don't like statements like this one. This gives the impression that the losses are permanent, when that may not be the case. A lot of the bank stocks have lost in value but in the last couple of weeks their value increased. For such a volatile object, like stocks to say that something is lost or gained, that is not good. That should be put in context. If I had bought C stock at $40 and then sold it at $1 that should have qualified as a $39 loss. But now C is at $3. If C goes back to $20 in a couple of years and it was sold then, what loss would that be? The loss and gain must be calculated at the selling point not before.

I don't recommend any strategy, I bought C at $7 and $3.5. I am just making a point. I think that it is troubling that so many of the news media outlets nowadays are providing information that is partially correct.

Sending report...

Chuck Saletta has been a regular Fool contributor since 2004. His investing style has been inspired by Benjamin Graham's Value Investing strategy. Chuck also can be found on the "Inside Value" discussion boards as a Home Fool.